100+ Free ALU 101 Practice Questions

Explanation: The numerical rating system assigns the average accepted risk a value of 100%, representing standard mortality. Favorable factors (credits) reduce this figure while unfavorable factors (debits) raise it. A final rating near 100% indicates a standard risk.

Explanation: Unfavorable factors are assigned positive values called debits, which are added to the base rating of 100%. Favorable factors are credits, which are subtracted. The net of debits and credits produces the final mortality rating.

Explanation: A substandard (rated) risk is insurable but has greater-than-average mortality, so it is issued with an extra premium, usually via table ratings or a flat extra. It differs from a declined risk, which is uninsurable. Substandard applicants still receive coverage, just at higher cost.

Explanation: The preferred class is reserved for applicants with the most favorable build, blood pressure, lab values, family history, and lifestyle, and it carries the lowest premium rates. Standard reflects average mortality, while table-rated and substandard classes carry extra premiums. Preferred criteria are stricter than standard.

Explanation: Underwriting exists to assess and classify each applicant's risk so that the premium charged is commensurate with the expected mortality of that risk class. This protects the equity of the risk pool and the financial soundness of the insurer. Proper classification ensures fair pricing across applicants.

Explanation: Anti-selection is the tendency of people who know or suspect they have impaired health or elevated risk to apply for insurance at a higher rate than average risks. Underwriting tools such as the MIB, APS, and medical requirements exist largely to counter anti-selection. Left unchecked, it would distort the mortality experience of the risk pool.

Explanation: An Attending Physician Statement (APS) is a report obtained from the proposed insured's treating physician summarizing diagnoses, treatment, and history. It is ordered when application or other data suggest a need for detailed clinical information. The APS is one of the most important tools for evaluating significant impairments.

Explanation: The MIB is a member-owned organization that stores coded information from prior insurance applications and alerts member companies to discrepancies, helping deter fraud and anti-selection. It does not contain full medical records and is used as a checkpoint, not a sole basis for a decision. MIB codes indicate the type of condition and the source of the information.

Explanation: A flat extra is a fixed dollar amount charged per $1,000 of coverage to cover a specific extra mortality or hazard, such as a dangerous avocation or aviation exposure. It can be temporary or permanent and is added on top of the base premium. Flat extras are typically used for constant or hazard-based extra risk rather than age-increasing mortality.

Explanation: Insurable interest exists when the policyowner would suffer a genuine financial or emotional loss from the insured's death, or benefit from their continued life. It must exist at policy inception and prevents wagering on human lives. Examples include family relationships and business/creditor relationships.